Rita Crundwell, the former comptroller of Dixon, Illinois, arrives at the federal courthouse in Rockford for her arraignment on charges she embezzled $53 million from the town since 1990. (Credit: CBS)

Updated 05/07/12 – 3:03 p.m.

ROCKFORD, Ill. (CBS) — The former comptroller and treasurer for the western Illinois town of Dixon has pleaded not guilty to charges she stole more than $50 million from the town.

WBBM Newsradio’s Regine Schlesinger reports 59-year-old Rita Crundwell was arrested last month, and charged with one count of wire fraud. She’s accused of setting up a secret bank account and embezzling $53 million from Dixon over the last two decades.

Crundwell entered a not guilty plea when she appeared for her arraignment at the federal courthouse in Rockford on Monday. She refused to speak to reporters before or after her court appearance.

Dixon Mayor James Burke – who worked side-by-side with Crundwell as she was allegedly stealing money – said no one in the town government had any idea about the embezzlement.

“During that time, we had five city councils, three finance commissioners, three mayors, and 21 audits; and it got by everybody,” he said.

Burke said the alleged embezzlement came to light while Crundwell was on vacation.

“The red flag that uncovered the whole thing was a bank statement that inadvertently had come to the clerk at city hall, and she gave it to me, and I took a look,” he said. “I was sure there was something wrong.”

Burke said he met with the FBI the next day, but had to continue working with Crundwell as the federal investigation continued for five months, until her arrest in April.

During that time, Burke said he and others who knew about the probe had to be careful not to tip off Crundwell.

“We had to carry on the façade, like we didn’t know anything going on,” Burke said.

But, in reality, Burke was on the phone with the FBI almost daily, secretly providing city bank records for five months, until federal investigators showed up at Dixon’s city hall to question Crundwell.

Burke said Crundwell showed no emotion when FBI agents told her who they were. He said the FBI questioned Crundwell for more than two hours before arresting her.

“We had about $880 million in income during that period of time,” Dixon Mayor James Burke said. “So, she got about 6 percent of it.”

How do people reconcile Crundwell’s lavish lifestyle with her relatively modest salary?

”I got to admit, I was suspicious of her, because of her lifestyle. I really was.” he said. But he’d heard that she made a lot of money from her horse breeding business, which produced 52 champion horses, and that allayed some of his fears about her lavish lifestyle, despite her salary of $80,000 a year.

Federal investigators said Crundwell’s horse farms were funded solely by the taxpayer dollars she allegedly embezzled.

Almost a month after she was arrested and fired, remnants of her are still around at the office she used at Dixon city hall; including mail, handwritten Post-It notes, and a few personal items tossed in a cardboard box.

Burke said those items have been left in the office, because the small town is still working to rebuild – not only its finances, but also its trust.

“It makes me wonder, you know, how this all could take place, and so many people – including myself – didn’t uncover it,” Burke said.

Federal prosecutors are seeking forfeiture of $53 million, along with 311 quarter horses, three houses, a horse farm, a dozen trucks, a 1967 Chevy Corvette, and about $224,000 in cash.